FRR, France’s €33.4bn pension reserve fund, faces an extra drawdown of at least €13bn plus acceleration of a scheduled liability as part of a government plan for dealing with deficits in the social security system as a result of the coronavirus pandemic.
Unveiled last month with corresponding draft legislation, the government’s plan is for €136bn of social security debt to be transferred to Cades, the public body responsible for paying off such debt.
According to credit rating agency Fitch, the €136bn includes €31bn in accumulated social security deficits as at the end of 2019, and projected deficits for 2020-2023 of €92bn.
It also includes €13bn corresponding to one-third of French hospitals’ debt, with Fitch noting that this would be the first time that the French state would use Cades to financially support hospitals in the country.
The government’s plan also involves extending Cades’ lifetime – the debt amortisation date – from 2024 to 2033.
The link with FRR is a function of this postponement. Following a major pension reform in 2010, FRR has since 2011 been paying €2.1bn to Cades every year to support the amortisation of debt incurred by the social security system.
The last payment is currently due in 2024, but in the draft legislation introduced last month the government is proposing that FRR be required to continue annual payments to Cades, albeit for €1.45bn rather than the current €2.1bn.
The extension of FRR’s allocation to Cades is foreseen “to the extent that a significant portion of the current or future debt relates to the pension regimes”.
According to the government, the proposal would see FRR making the revised annual payment until 2033 – meaning €13.05bn in extra payments – “or until reserves are exhausted”.
CNIEG liability to be accelerated
A second proposed measure affecting FRR involves the bringing forward of a scheduled payment to CNAV, the national old-age insurance fund.
FRR has been due to make the payment, in one or several instalments, potentially from this year, but the government wants to see it paid by the end of July at the latest.
In the text of the draft legislation, the government said this was because there was a need to “rapidly improve the cash situation” in the general social security regime given pressures brought on by the COVID-19 pandemic.
The payment in question represents the value of assets FRR has been managing on behalf of the CNAV since a 2005 reform of the pension scheme for the electricity and gas sector, which that year became affiliated to the general regime in France.
Accrued pension rights were transferred from the Caisse nationale industries électriques et gazières (CNIEG) to CNAV, and participating employers had to make a balancing payment in cash. It is part of this that FRR has been managing for the benefit of CNAV since then.
The amount of FRR’s CNIEG liability is not fixed in law, but depends on investment performance.
According to the text of the bill, as at the end of April the market value was €4.9bn. The government is proposing that the value be fixed as at 29 May, and that its calculation would be subject to review by FRR’s auditors.
The draft legislation has this week been reviewed by a special parliamentary committee, which has proposed amendments but none appearing to affect the changes facing FRR.
FRR recently had to rein in plans to shift to a new investment model as a result of the coronavirus and president Emmanuel Macron’s decision to suspend the pension reform alongside other reforms. This week the French media have been reporting and weighing comments from Macron’s entourage that the president wanted to pick up the reform “in part”.
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